Company registration in Japan: a brief guide

Company registration in Japan: a brief guide

Japan is a strategically important market with a robust economy and a stable business environment. As the world's third-largest economy by nominal GDP, it offers significant opportunities for international businesses. Its technological prowess, high consumer purchasing power, and advantageous location in Asia make Japan a prime destination for foreign investment.

In this guide, we will delve into the key aspects of company registration in Japan, including the available legal entity forms, legal requirements for foreign investors, the registration process, tax regulations, labour laws, and the banking system's features.

An overview of Japan's business environment

Japan's economy holds a distinguished position on the global stage due to its innovative approach, high industrial development, and stable economic policies. In 2023, Japan's GDP reached US$4.21 trillion, making it the world's fourth-largest economy by nominal GDP — a testament to its status as an economic powerhouse.

Japan's commitment to research and development is significant, with approximately 3.2% of GDP invested in this area, one of the highest rates globally. According to the World Bank, Japan has one of the lowest levels of government debt among developed countries relative to GDP, reflecting its prudent fiscal policies.

Japan consistently scores well in international business rankings, thanks to its transparency, ease of doing business, and integration with the global economy. In the World Bank's 2020 Doing Business Index, Japan ranked 29th out of 190 countries, receiving high marks for protecting minority investors and facilitating cross-border trade, which underlines its openness to international collaboration and investment.

The infrastructure in Japan is among the best globally, featuring an extensive high-speed rail network, advanced port facilities, and cutting-edge communication systems. This robust infrastructure supports efficient business operations and simplifies logistics and operational processes.

Japan's political stability and high standard of living contribute to a conducive environment for business development. The Japanese government actively promotes innovation and technological progress, fostering a positive climate for new enterprises and attracting foreign investment.

Japan's exports are driven by high-tech products, such as automobiles, electronics, robotics, and pharmaceuticals, reinforcing its reputation as one of the most innovative economies worldwide.

Top business-friendly cities in Japan

Japan's robust economy and strong industrial foundation make it an attractive location for business. The country boasts several cities, each offering unique advantages for various business activities. Here's an overview of some of Japan's best cities for business and what sets them apart.

Tokyo

Tokyo, the nation's capital, is one of the world's leading financial hubs. It attracts global corporations and startups alike, thanks to its sophisticated infrastructure, extensive talent pool, and large consumer market.

Advantages:

• Hosts numerous international corporations.
• Offers a highly developed transportation network and advanced technological infrastructure.
• Abundant business events and exhibitions, providing ample networking opportunities.

Osaka

Osaka is recognised for its commercial prowess and serves as a significant industrial and economic centre. The city is particularly well-suited for businesses in the pharmaceutical and manufacturing sectors.

Advantages:

• Boasts a highly developed industrial base.
• Office and living costs are generally lower than in Tokyo.
• Strategically located in central Japan, providing logistical convenience.

Nagoya

Nagoya is one of Japan's largest seaports and plays a pivotal role in the automotive and aerospace industries. It's an attractive location for companies operating in these and other technology-intensive sectors.

Advantages:

• Features a strong industrial base with several large manufacturing companies.
• Offers favourable conditions for engineers and technical specialists.
• Has a well-developed transportation and logistics infrastructure.

Fukuoka

Fukuoka is emerging as a hotspot for startups, especially in information technology. The city actively supports innovative enterprises and provides various incentives for new businesses.

Advantages:

• Has an active startup community.
• Government support and incentives for new companies.
• Geographic proximity to other Asia-Pacific countries.

Sapporo

Sapporo is known for its tourism, agro-industry, and eco-tech sectors. The city stands out for its pristine natural environment and high quality of life.

Advantages:

• Offers a high standard of living.
• Ideal for tourism-related businesses and services.
• Promotes sustainable and environmentally friendly technologies.

These cities are just a selection of the many business-friendly locations in Japan. When choosing a location for your business, consider factors like the industry, target market, and available resources to find the best fit for your company's needs.

Promising business opportunities in Japan

Japan's dedication to innovation and technological progress makes it a fertile ground for business opportunities across a variety of industries. The following are key sectors that present promising avenues for establishing and growing a business in Japan.

1. Information technology and digitalisation

Japan is at the forefront of the global digitalisation trend, investing heavily in the IT sector, with a particular focus on artificial intelligence, machine learning, and big data. The advancement of 5G technology and the Internet of Things (IoT) also creates new opportunities for startups and foreign companies seeking to establish a presence in the Asian market.

2. Healthcare and biotechnology

Given Japan's status as one of the fastest-ageing nations, there is a growing demand for medical services, devices, and pharmaceuticals. The healthcare sector is supported by both private and public investment, with biotechnology and pharmaceuticals offering lucrative business prospects due to strong research and development activities.

3. Energy and renewable resources

Following the 2011 Fukushima nuclear disaster, Japan has shifted its focus towards renewable energy sources such as solar, wind, and hydropower. This transition offers significant potential for companies specialising in clean energy technologies, resource efficiency, and environmentally friendly practices.

4. Tourism and hospitality

Japan is renowned for its rich cultural heritage, stunning landscapes, and advanced technology, making it a popular international tourism destination. This sector offers opportunities in hospitality, travel, services, and entertainment. Infrastructure developments and high-profile international events, such as the Olympic Games, have further boosted the industry's appeal.

5. Agriculture and food technology

While Japan isn't traditionally known for agriculture, there's a growing need to enhance the efficiency and sustainability of farming through technological innovation. Technologies like genetically modified organisms (GMOs), vertical farming, and smart agriculture are attracting attention from both local and foreign investors.

Overview of Japan's legal framework for foreign investors and businesses

Japan's legal system is grounded in continental law principles, characterised by comprehensive regulations covering all aspects of economic activity, including business and investment. Key regulations of interest to foreign investors are outlined.

Companies Act

The Companies Act is the primary legislation governing corporate activities in Japan. It sets out the requirements for establishing and operating businesses, including Kabushiki Kaisha or JSC and Godo Kaisha or LLC. The Act specifies the min. capital requirements, management structure, corporate governance, and financial reporting obligations.

Foreign Exchange and Foreign Trade Act

This legislation governs foreign economic activities and international trade in Japan. It regulates foreign trade transactions, including the export and import of goods and services, as well as foreign direct investment. The Act establishes notification and permit procedures for foreign entities conducting economic activities in Japan. It also imposes restrictions on business in certain sensitive industries, such as defence, energy, and telecommunications.

Common business structures for registration in Japan

Japan's corporate law provides various business structures for registration, each with specific characteristics and capital requirements. Here's an overview of the main types of business entities that foreign investors can establish in Japan.

Business Structure	Description	Key Features	Capital Requirements
JSC	Most common business structure, offering limited liability to shareholders and suitable for large transactions and public financing.	- Requires at least one shareholder and one director (can be residents or non-residents of Japan). - Can issue shares to the public. - Strict regulations and financial reporting obligations.	No set minimum capital; typically 1 million yen or more.
LLC	Ideal for small to medium-sized businesses due to flexible management and fewer disclosure requirements.	- Requires at least one founder (who can also be the director). - Simpler governance structure. - Fewer formalities compared to JSC. - Less disclosure requirements.	No minimum capital; can be registered with as little as 1 yen.
Special Limited Partnership	Primarily used for investment projects like venture capital and real estate.	- Requires at least one general partner (with unlimited liability) and one limited partner (with limited liability). - Liability of limited partners extends only to their investment. - Ideal for investment projects.	Capital requirements not defined by law; typically set by partnership agreement.
Branches and representative offices	Extensions of foreign companies for operating in Japan without creating a separate legal entity.	- Branches can conduct business and earn profits. - Representative offices are limited to marketing and research. - Useful for foreign companies not wishing to establish a separate entity.	No capital investment required, but financial support from the parent company may be needed for branches.

These business structures offer a range of flexibility and control, each with its own advantages and regulatory requirements. Foreign investors considering business in Japan should choose the structure that best aligns with their operational needs and strategic goals.

Step-by-step guide to registering a company in Japan

Registering a company in Japan is a detailed process requiring careful planning and strict adherence to legal requirements. Here's a step-by-step guide to help you successfully navigate the process:

Phase 1: Choose a business structure

Begin by determining the type of business entity you wish to establish in Japan. The choice of structure will impact your company's liability, taxation, and governance.

Phase 2: Select a company name

Select a unique name for your company. The name must not conflict with existing names in the Japanese Trade Register and must be approved by the Ministry of Justice.

Phase 3: Determine the registered address

Establish a registered address in Japan. This address is required for official correspondence and is necessary for company registration.

Phase 4: Prepare the Articles of Incorporation

Draft the company's charter or articles of incorporation, outlining the company's structure, the roles of directors and founders, and the distribution of shares. These documents must comply with Japanese corporate laws.

Phase 5: Register with the Ministry of Justice

To officially register your company in Japan, submit the necessary documents to the Ministry of Justice and pay the requisite government fees. This step includes the completion and filing of all required paperwork.

After these steps, your company is ready to commence operations in Japan. The registration process can take several weeks to a few months, depending on the complexity of your business structure and the efficiency of your document preparation.

Online company registration in Japan

Japan has embraced digitalisation, allowing for partial online registration of companies, which can be especially beneficial for foreign investors. The Ministry of Justice provides platforms for submitting essential documents electronically, including the articles of incorporation. However, finalisation of the registration often requires a physical signature and stamp from an authorised representative, which might necessitate a visit to Japan or the use of a Japanese notary public.

Law firms such as TK DEAL offer comprehensive services to assist foreign investors with business registration, providing:

• Document preparation and filing
• Temporary legal address services
• Assistance with hiring personnel
• Opening a corporate bank account
• Tax and legal consultations

Moreover, Japanese legislation now recognises digital signatures and seals, which facilitates remote management of your company. This digital adaptability means that company administration can be conducted without the need for a constant physical presence in Japan. Digital seals (inkan) and signatures are considered legally valid, allowing for a more efficient business process.

Legal requirements for foreign investors in Japan

Registering a company in Japan as a foreign investor entails specific legal requirements to ensure compliance with local laws and regulations.

While Japanese law does not generally require a local director for most company structures, there are exceptions, such as when registering a branch of a foreign enterprise, which requires a local representative. However, having a local director can facilitate business operations in Japan, including interactions with local authorities and financial institutions.

A registered legal address is mandatory for all companies in Japan. This must be a genuine office space, not just a mailing address. This requirement ensures the company's transparency and allows for government communication. In certain cases, particularly for branches of foreign companies, proof of a lease or property ownership may be required.

Directors in Japan have significant legal responsibilities to manage the enterprise. They must act in the best interests of the company and its shareholders, complying with all relevant laws and regulations. Key responsibilities include:

• Corporate management is crucial for directors to ensure financial stability and alignment with corporate direction.
• Directors must ensure the company adheres to Japanese law, including fiscal and labour regulations.
• Directors are responsible for reporting financial information to the appropriate government authorities.

Directors are also subject to liability for company actions that could harm the company or third parties. In cases of bankruptcy or financial misconduct, directors can be held personally liable if found to have acted negligently or in wilful violation of the law.

Industry-specific regulatory requirements for companies in Japan

Japan's regulatory environment is stringent, especially for industries where quality and safety are paramount. Each industry has its own set of specific regulatory requirements and processes for obtaining necessary licences. Here are some industry-specific regulations for businesses operating in Japan.

IT companies

Companies in Japan that process personal data must comply with the Personal Information Protection Law, which governs the collection, use, and storage of personal data. Registration with a local regulator is mandatory, and appointing a data protection officer may be required. Additionally, IT companies must follow strict cybersecurity protocols, particularly when dealing with critical infrastructure or sensitive financial data.

Manufacturing companies

Manufacturing companies in Japan must obtain certification to international and national product quality and safety standards, such as ISO or the Japanese Industrial Standards (JIS). Licensing and regular inspections of manufacturing facilities ensure compliance with safety regulations.

Pharmaceutical companies

Before a pharmaceutical product can be distributed in Japan, it must be registered with the Ministry of Health, Labour, and Welfare (MHLW). This process involves conducting clinical trials and proving the product's efficacy and safety. To manufacture medical products, companies must obtain a special licence that demonstrates compliance with Good Manufacturing Practice (GMP) standards.

Tourism industry

Travel agencies in Japan are required to obtain a licence from the Japan Tourism Agency, which regulates their activities to protect consumer rights. Hotels and other accommodation providers must meet rigorous safety and quality standards to operate legally.

Each of these industries in Japan has unique regulatory challenges that require careful compliance. Companies should ensure they understand and adhere to these regulations to operate successfully in the Japanese market.

Special economic zones

SEZs in Japan were established to stimulate economic growth, attract foreign investment, and foster innovation in key industries. These zones offer a range of benefits and advantages for businesses operating in Japan, creating favourable conditions for company development and expansion.

Benefits of investing in SEZs

• Tax incentives
  • SEZs provide considerable tax advantages, including reduced corporate tax rates or complete tax exemptions for a specified period. They also offer reduced income tax for new investment projects, as well as property tax and income tax benefits for foreign specialists.
• Streamlined administrative processes
  • SEZs offer simplified administrative procedures through a "one-stop shop", which expedites the process of obtaining necessary permits and licences. This streamlining reduces bureaucratic delays and ensures faster processing of applications.
• Infrastructure development
  • The Japanese government has made significant investments in developing SEZ infrastructure, including transportation networks, communication systems, and energy supplies. High-quality office and industrial spaces are available for rent or purchase, facilitating business operations.
• Support for foreign investors
  • Foreign investors in SEZs benefit from extensive support services, including information and consulting on doing business in Japan. Additionally, SEZs assist in recruiting skilled workers and connecting with local suppliers and partners.
• Technological and innovation incentives
  • SEZs support research and development through various grants and subsidies for innovative projects. They also foster high-tech clusters where businesses can collaborate with scientific institutes and universities.
• International collaboration
  • SEZs promote international networks and partnerships, providing businesses with broader access to global markets and facilitating business expansion beyond Japan.

Notable SEZs in Japan

• Tokyo focuses on financial and innovative technologies.
• Osaka specialises in biomedical research and development.
• Fukuoka is renowned for supporting startups and entrepreneurship.

Investing in SEZs in Japan provides significant benefits, accelerating company growth and development through numerous incentives and government support. These zones aim to attract investors interested in advancing modern technological, scientific, and innovative projects, contributing to Japan's overall economic growth.

Fiscal and financial obligations in Japan

Japan's corporate taxation system is comprehensive, with a variety of taxes at both the national and local levels. The system includes multiple layers of corporate tax, complemented by a range of tax breaks and incentives designed to foster business growth and attract investment.

Corporate tax structure

• CIT: Japan's corporate income tax rate varies depending on the company's size and income. The basic corporate tax rate ranges from 15% to 23.2%, with additional local taxes and a 15% national tax that collectively bring the total effective tax rate to between 21.42% and 34.59%.
• Local taxes: these taxes vary depending on the company's location and regional tax policies.
• Prefectural tax: imposed at the prefectural level, this tax is generally around 5% of corporate income tax, but it can vary based on the prefecture's regulations.
• City/municipal tax: this tax applies to businesses operating within specific municipalities. The rates usually range from 12.3% to 14.7% of corporate income tax.

Together, these taxes contribute to a variable overall tax burden depending on the company's location and local tax structure.

VAT

Japan's consumption tax, akin to VAT, is set at a standard rate of 8%. This tax applies to most goods and services, with some food items subject to a reduced rate.

Financial reporting and audit requirements

Companies in Japan must adhere to stringent financial reporting and auditing standards:

• Financial statements: Companies must prepare and submit financial statements, including a balance sheet, an income statement, and a cash flow statement. These reports must align with Japanese GAAP or International IFRS, depending on the company's preference.
• Annual audits: large corporations are required to undergo annual audits by licensed auditors to ensure the accuracy of their financial statements and compliance with corporate and tax laws.
• Tax returns: all Japanese companies must file tax returns with the relevant tax authorities by March 31 of each year for the previous fiscal period. These returns must accurately reflect the company's financial condition and contain all necessary tax calculations.

These financial obligations and audit requirements ensure transparency and compliance, fostering confidence in Japan's business environment.

Foreign businessmen looking to establish a business in Japan must navigate a range of restrictions and requirements. The following are some key considerations:

1. Visas and residency status

To work or manage a business in Japan, foreigners need appropriate visas or residency status. Common visas for business purposes include:

• Investor/business manager visa: for those starting or managing a business.
• Engineer/specialist in humanities/international services visa: for specific professions.
• These visas typically require specific financial and operational prerequisites.

2. Ownership restrictions

While Japan generally permits 100% foreign ownership in most business sectors, some industries have restrictions on foreign ownership or require government approval, such as broadcasting and telecommunications.

3. Industry-specific regulations

Certain industries have additional regulations. For example:

• Pharmaceuticals: strict requirements for licensing and approvals.
• Food and beverage: compliance with health and safety standards.
• Finance: licensing and compliance with financial regulations.

4. Language and cultural barriers

Language can be a significant barrier, as most business and legal documentation is in Japanese. Cultural differences can also impact business practices and negotiations.

These are some of the primary restrictions and requirements for foreign businessmen in Japan. The specifics can vary depending on the industry and business structure, so it's advisable to consult legal or business experts for personalized guidance.

Entrepreneurship in Japan: a comprehensive overview

Japan is renowned for its thriving private entrepreneurship sector, largely due to robust state support for small and medium-sized businesses. Approximately 95% of Japanese enterprises fall into this category, indicating the country's commitment to fostering entrepreneurship at all levels.

Coexistence of small and large businesses

Japan's business landscape is diverse, with small and medium-sized businesses operating alongside international corporate giants. Family businesses are especially prevalent, with many private homes' ground floors serving as workshops, factories, shops, restaurants, dry cleaners, and medical clinics. These businesses are often run by families, typically consisting of three to five members. This tradition of family-run enterprises contributes to a stable and inclusive business environment, where large businesses rely on smaller ones to form a cohesive and synergistic economic system.

Interdependence and symbiosis

A key feature of the Japanese business model is the interdependence between large corporations and small businesses. Larger companies frequently outsource to smaller contractors, maintaining a long chain of technology and production that serves large enterprises. This system is reinforced by laws that prevent large companies from monopolising the market, ensuring that small and medium-sized enterprises are protected.

Categories of small businesses

Japanese small businesses can be broadly classified into three categories:

• Family Enterprises: Comprising 32% of small businesses, these are typically family-run operations.
• Legal Entities: Representing 20% of small businesses, these are registered companies with more formal structures.
• Private Entrepreneurs: Making up 48% of small businesses, this category includes self-employed individuals and small partnerships.

Historical context and government support

Japan's entrepreneurial spirit gained momentum after the hardships following World War II. In 1963, the government enacted the "Basic Law on Small and Medium Enterprises," which provided a range of incentives and support mechanisms for small businesses. These included subsidies, loans, simplified registration processes, and training opportunities. This support has allowed small businesses to play a significant role in supplying parts and components to large corporations, both within Japan and internationally.

Business sectors and collaboration

In Japan, small and large businesses collaborate across various sectors. In manufacturing, larger corporations often rely on smaller subcontractors for labour-intensive processes. In construction, small businesses contribute to mass housing projects, while larger firms handle larger-scale infrastructure projects such as roads, factories, and high-rise buildings.

Despite the country's conservative corporate culture, which values long-term relationships and a commitment to quality, the Japanese market offers a variety of opportunities for both local and international businesses. However, entering the Japanese market can be challenging due to stringent requirements and a need for established connections.

Entering the Japanese market

To successfully enter the Japanese market, you need to comply with specific regulations, such as obtaining an investor visa. This process can be complex, requiring:

• A detailed business plan and step-by-step development strategy.
• Documentation proving residence in Japan and intent to live in the country.
• A bank account statement.

Once these requirements are met, businesses can explore various organisational and legal forms, including joint-stock companies, limited liability companies, regional branches, and private entrepreneurship.

Key legal requirements

Business operations in Japan are governed by a set of laws and regulations, including:

1. Law on Control of Foreign Economic Activity and Foreign Trade: Governs international business activities.
2. Japan Commercial Code: Regulates corporate structures and commercial activities.
3. Economic Code of Japan: Addresses broader economic regulations.
4. Antimonopoly Law: Ensures fair competition.
5. Law on Intellectual Property Rights: Protects patents, trademarks, and other intellectual property.
6. Law on Support of Small and Medium Enterprises: Provides government support and incentives.
7. Law on Assistance for New Business Creation: Encourages innovation and entrepreneurship.

Japan's business environment requires time and trust to establish successful connections. Working with a reputable Japanese partner can significantly enhance a business's credibility and facilitate entry into the market. Success in Japan ultimately depends on a thorough understanding of its unique business culture, legal landscape, and the interdependence between small and large businesses.